Inclusive Growth in Sri Lanka

1. Inclusive Growth in Sri Lanka Saman Kelegama Institute of Policy Studies of Sri Lanka

2. Introduction • Sri Lanka has been categorized as a middle income country by the IMF in January 2010, it grew by average 5% during the conflict years (1983 to 2009) • With the rapid growth, poverty head count ratio estimated by the Department of Census and Statistics has been declining with an aberration in the mid-1990s : poverty increased from 26.1 in 1991/92 to 28.2% in 1995/96 and thereafter declined to 22.7% in 2002 to 15.2% in 2006/07 • The income poverty target of the Millennium Development Goals (MDGs) in Sri Lanka is on track • However, poverty based on US$ 1 a day will become more than double if US$2 a day is considered implying that there are a number of people just above the US$ 1 a day poverty line who are vulnerable to external shock or ill health • Despite poverty reduction, two types of inequalities are visible in Sri Lanka: income inequality between top and bottom income deciles and regional disparities • Besides a new form of social inequality has arisen in the conflict affected areas that are gradually coming back to normalcy • The reasons for the existing inequalities, post-conflict emerging issues, and the constraints for inclusive growth will be examined

3. Economic Growth • The 5% average growth during the conflict years was due to accumulation of physical capital, labour, as well as total factor productivity growth • This growth trend is continuing at average 6% with TFP playing more important role in the post-conflict years • Yet labour (human resources/education) and physical capital (infrastructure, etc) still plays a key role in the growth process according to existing studies on determinants of growth • Overseas worker remittances, export sector, services, and the public investment programme played a key role in the overall economic growth process • In order to make the growth inclusive successive governments have been introducing various social welfare programmes • Special economic/social programmes for the conflict affected region have been put into operation since 2008/2009 and the economic/social package is seen as a substitute to a political package in the short term by some key actors

4. Policy Ingredients of Inclusive Growth Inclusive Growth • High and Sustainable • Growth Social Inclusion Expansion of Human Capacity Good Policies and Sound Institutions Social Safety Nets Removing Social Injustice

5. Income Inequality between Top and Bottom Income Deciles • Income inequality, as per the Gini coefficient, has increased between 1990 and 2006 from 0.43 to 0.49 • The share of the poorest quintile (20%) in national consumption has declined from 8.9% in 1990 to 7.1% in 2006/07 • Average per capita consumption during 1990/91 -2002 grew by 50% for the richest consumption quintile but by only 2% for the poorest quintile

6. Income Inequality and Growth • Inequality has increased significantly in the 1990s and has remained rising thereafter • A decomposition analysis show that income flows associated with access to infrastructure, education, and the nature of occupation are the principle determinants of inequality and the main drivers of the change of income distribution • The contribution from income flows to education and infrastructure to the change in inequality appears to have increased over the years • In short, growing inequality is explained mainly by growing disparity in households’ access to education and infrastructure • The same variables were found to be the main drivers behind the rightward shift of the entire income distribution • Clearly, the same policy variables that were responsible for widespread economic growth were also responsible for widespread inequality

7. Poverty Headcount Ratio by Sectors and Provinces

8. Regional Disparities • There is a declining trend in poverty in rural and urban sectors while it is increasing in estate sector • Poverty head count ratio has declined in all districts except Nuwara Eliya and Monaragala where the poverty head count ratio is more than double at national level (UNDP/IPS, 2010) • Inadequate infrastructure facilities, inadequate development of the agricultures sector of where the most of the labour force participants are working, weak targeting in welfare programmes, inadequate employment opportunities in less developed regions, low level of employment growth, high level of employment in informal sector, and differences in real wages, can be identified as possible reasons for this inequality in Sri Lanka

9. Challenges in Post-Conflict in Sri Lanka

10. Challenges in Post-Conflict in Sri Lanka cont. • The war situation in Sri Lanka more or less destroyed such infrastructure of the North and to some extent in East. For e.g., the entire road transport network and railway lines in Northern and Eastern Provinces was severely damaged including the A9 road, connecting the Jaffna District to southern parts of the country • Closure of A9 road disconnected war affected region from the rest of the country and led to negative impacts on livelihood of the war affected people through loss of market. In addition, destruction of assets, migration, loss of family members especially breadwinners, destruction of financial market negatively impacted on the livelihood of the people in the conflict affected areas • Samurdhi poverty alleviation programme (main poverty alleviation programme of the government) was not operational in Killinochchi, Mannar, and Mullativu districts before the liberation of those areas due to the collapse of the administrative structure • Population displacement together with assets depletion lead to a new form of social inequality • Deprivation of entitlements were high

11. Policies for Inclusive Growth in Sri Lanka

12. Sustainable Growth • “Mahinda Chintana Idiri Dekma’ (MCID) is the main policy plan of the government • Priority has been given to the regional development by MCID • Education, health, livelihood development, social protection, disaster management, and water supply are covered by the social development plan of MCID • For achieving these broader objectives, MCID focuses on physical infrastructure development and promotion of business friendly environment to strengthen the market oriented economy and specific market interventionist measures to achieve the social development objectives • Growth and social inclusion are basically in-built to the MCID

13. Physical Infrastructure • Randora Programme (National Level Infrastructure Development Programme) • Economic infrastructure: ports and aviation, irrigation, education and health infrastructure, urban development, and development of townships. • ‘Gama Neguma’ and ‘Maga Neguma’ • Small scale infrastructure facilities in all regions • Road development, energy, water supply and sanitation, reconstruction of canals, construction of small scale rural buildings, small scale infrastructure development, transport and rural infrastructure at regional level

14. Business-Friendly Environment through Tax Measures New Tax Measures Implemented in 2010/2011 • Taxes on import of machinery and equipments have been reduced • Income tax for the industries with value addition has been reduced from 15% to 10% • Reduced tax on all exports from 15% to 12% • Reduced income tax on profit of the domestic industries from 35% to 28% • Machinery and equipment to manufacture textile, leather, footwear and bags are exempted from import duties and VAT • A CESS is imposed on all exports of raw and semi processed items while, finished products are free from CESS • VAT on financial sector has been reduced from 20% to 12% • Objectives • Increase the exports of value added products • Improve the accessibility to world class technology • Promoting domestic production • promote the tourism sector • Promotion of other services

15. Conflict Affected Areas and Infrastructure Development • Negenahira Navodaya (implemented in 2007 with the aim of developing the Eastern province) • Short run objectives - de-mining, livelihood recovery, and reconstruction of damaged infrastructure • The focus of the economic infrastructure is on electricity supply, roads, transport, port water and sanitation, and rural infrastructure • Most of the infrastructure development programmes operating at the national level have been fully extended to the Eastern province. • Uthuru Wasanthaya (initiated in 2009 for developing Northern province) • Two stages: a 180-day programme and Medium term plan for 2010-2011 • The focus of the first phase is on de-mining, resettlement of IDPs, reconstruction of damaged economic and social infrastructure, livelihood recovery, and employment generation • The second phase covers the areas of infrastructure development, electricity, water supply and sanitation, health, solid waste disposal, education, sports, cultural affairs, transportation together with livelihood development programmes

16. Social Inclusion

17. Expanding Human Capacity • Education • According the Education Act of 1945, education in Sri Lanka is free from Grade 1 to degree level and it is universal • The government expanded the school network to fulfill the demand for education • With the purpose of overcoming regional imbalances, increasing educational opportunities for the poor and increasing the quality of education, successive governments have introduced various policies over the years • establishment of central colleges in 1940s, • implementation of the common-curriculum in the 1970s, • introduction of intervention strategies to compensate for socio-economic differences, for e.g., introduction of Grade 05 scholarship programme, • district based university enrolment system in 1979, • free school text book programme initiated in 1980, • free midday meal programme, • free uniform material programme introduced in 1993, • subsidized transport facilities

18. Expanding Human Capacity • Public expenditure on education increased with the introduction of free education in early 1950s till the mid 1960s • Government was able to spend more than 4% of the GDP on education mainly by taxing the plantation exports • With the gradual decline of terms-of-trade for plantation exports and ideological shift to neo-liberal economic policies in 1977, the expenditure on education declined below 3% of GDP

19. Challenges in Education in the Post Conflict situation • Due to the conflict, education of the most of the students of the conflict-affected areas was disrupted due to displacement, loss of family members, psychological impact, loss of school materials, and the destruction of school buildings and infrastructure • There are several issues which need to be considered in providing basic educational services for the conflict affected groups: • reintegrating to school curriculum, • dealing with ex-child-combatants, • providing educational infrastructure (essential materials such as furniture, teaching and learning aids), • ensuring adequate human resources, • psycho social support

20. Expanding Human Capacity • Health • The pattern of the public expenditure on health is somewhat similar to public expenditure on education • Public health expenditure was relatively high during 1950s and it recorded a peak in 1971 reaching 2.5 % of GDP • Thereafter it has fluctuated around 1.5% of GDP reaching about 1.8% lately

21. Challenges in Post Conflict Situation • Sri Lanka has bee able to maintain overall health indicators at satisfactory level despite of its economic downturns over time • There are regional disparities in health indicators and they are compounded in the conflict-affected districts • Maternal mortality rate is five times higher than those of at national level • Returned refugees are making a greater demand for health services • Current government has taken many steps to overcome these issues related to the conflict affected areas: • the Ministry of Health has taken several steps in recent months to develop the main hospitals in Jaffna district • Government has allocated more funds ($ 3.2 million) to uplift health care facilities in the Jaffna district • Government has allocated special funds ($ 4.4 million) under the ‘Uthuru Wasanthaya’ programme to improve health felicities in Jaffna peninsula

22. Selected Health Indicators for North and East

23. Social Safety Nets

24. Social Assistance, Welfare and Insurance Schemes • Samurdhi Programme • Introduced in 1995 it provides social assistance and social insurance for the poor • 1.6 million households covered by the programme • The objectives: to integrate youth, women and disadvantaged groups into economic and social development activities and to promote social stabilityand alleviate poverty • Overall budget for Samurdhi programme has been increased over time. In 2002, the maximum budget has been allocated for the Samurdhi programme and gradually it declined due to targeting adjustments. Year 2006 again records an increase in the allocation as Samurdhi benefits were increased by 50% for all the beneficiary groups

25. Social Assistance, Welfare and Insurance Schemes Samurdhi Programme Relief Empowerment Cash Transfer Social Security Fund Nutrition Rural Infrastructure Livelihood Programme & Samurdhi Banking Societies Social Development Housing

26. Other Social Welfare Programmes • Public Assistance Programme • Targets groups • poor among the elderly and disabled, • families without breadwinners, • destitute women and orphans. It provides average monthly grant of Rs 135 ($ 1.3) • Thriposha Nutrition Supplement Programme • Objective: enhancing the nutritional level of children less than 5 years and pregnant and lactating mothers • There were 580,000 beneficiary families in 2005 • Microinsurance programmes • In Sri Lanka, microinsurance programmes are mainly coming with the microfinance institutions and still they are in the initial stage • In addition to the microfinance institutions, commercial insurance such as Ceylinco Insurance Company also are involving in microisurance field

27. Labour Market Policies • Employees’ Provident Fund (EPF) • The largest retirement scheme in Sri Lanka • Formal private sector workers are eligible for this scheme and the employers and the workers have to make joint contributions at the rates of 12% and 8% of earnings respectively • The worker can withdraw the accumulated amount as a lump sum at the age of retirement • By the end of 2001, the EPF had coverage of about 65% of the eligible population • Public Service Pension Scheme (PSPS) • All the public sector workers are eligible for this retirement scheme • This is mandatory and non contributory scheme

28. Labour Market Policies • Voluntary Schemes (Farmers, Fishermen and Self-Employed Scheme) • Sri Lanka has introduced pension schemes by Acts of Parliament in 1987, 1990 and 1996 for the workers out side the formal sector • Two types of benefits: income component and social security benefits such as disability, disablement gratuity and death gratuity • The eligibility for these pension schemes depends on age and non-entitlement to other retirement schemes and in the case of farmers, for example, on the type of the crops cultivated • Self-Employed Pension Scheme • This is under the purview of Sri Lanka Social Security Board • Only certain types of workers are eligible for the scheme depending on the age, income, non-entitlement to other similar pension schemes, etc. • Two types of benefits: income component and social security benefits

29. Proposed Pension Schemes (2011 Budget) • Pension scheme for the workers in private sector and cooperate sector • a 2% contribution from employees and a 2% contribution from employers go to this scheme. • Overseas Employee’s Pension Fund (OEPF) • Migrant workers • A migrant worker has to contribute at least Rs 12,000 ($ 110) per annum for minimum two years • Citizens’ Pension and Insurance Fund (CPIF) • Senior citizens have to contribute a minimum of Rs 5,000 per year as and when they have money

30. Challenges • Inadequate development of the agricultures sector • Close to 30% of total employment is in agriculture sector and majority of people depend on the agriculture sector directly or indirectly • Productivity of this sector is very low and the cost of production is very high • Reasons for poor performance • the small size of average land holding size • less developed irrigation system and poor technology • poor institutional and market conditions • less developed infrastructure

31. Challenges • Weak targeting in welfare programmes • Samurdhi Programme • targeting errors • the number of Samurdhi beneficiaries is greater than the number of poor households in each district • there is a decline, around 9%, in the number of Samurdhi beneficiaries, however, this decline is same for both richest and poorest deciles • simply reducing the number of Samurdhi beneficiaries is not a comprehensive solution to the targeting errors • Political bias of grassroots level officers -- Samurdhi Development Officers (SDOs) -- is the major reason for targeting errors in Samurdhi programmes. Beneficiary selection was not successful due to political and other personal interventions though the selection criteria itself was sound • Government has introduced new participatory methodology named family Classification Methodology (FCM) to the beneficiary selection procedure in ----- but its effectiveness is yet to be seen

32. Challenges • Fertilizer Subsidy • In 2009, the fertilizer subsidy accounted for 3% of total government expenditure and 0.6% of GDP • This is a blanket programme, it incurs targeting errors • Inadequate employment opportunities in less developed regions • Total employed people in the informal sector remains high -- 61.3% of total employed • The high informal sector employment leads to inequality in Sri Lanka as there is a high wage gap between formal and informal sectors • Looking at the mean monthly salary distribution of monthly earners and the daily earners by major industry groups, it is evident that, in the services sector there is a high gap between those who are paid on monthly basis and those who are paid daily wages

33. Challeneges • Asset ownership of the poor: the case of land • In Sri Lanka the state distributed land under the Land Development Ordinance of 1933, to farmers on equal terms • Land reforms enacted in 1953-58 were meant to ensure tenure security to tenants and to regulate the rents paid to landlords • Identify land for redistribution by the states • Develop land and distribute • E.g.: Mahaweli development programme in Sri Lanka • Introduce land ceilings • E.g.: Sri Lanka - land ceilings were imposed on private ownership of land under reforms in 1976 and 1977 The experience of closer to 60 years now shows that inequity among these households have widened This highlights that land alone is not sufficient to bring in equity

34. Challenges • A large proportion of households , with access to microcredit, progress in poverty reduction has been rather modest. • Corporate asset ownership has not gone far enough in Sri Lanka • Significant disparity still prevail in the quality of education available to the urban elites compared to those who come from less privileged backgrounds or live in less developed areas • Little attempt appears to have been made by Sri Lankan policy makers to integrate unique interventions in land, credit, and education in order to address the problem of poverty within a holistic framework. Nor have these programmes taken into account of structural sources of poverty related to unequal access to land, knowledge, and capital • Large budget deficits and low revenue (14% of GDP) do not permit the government to allocate more resources to social welfare programmes. Any improvement thus needs to come from better targeting and identifying the key areas where existing funds should be allocated

35. Concluding Remarks • Sri Lanka has been experiencing a high growth during last few years • Poverty has declined but there are two types of inequalities in Sri Lanka: income inequality and regional disparity • The conflict which was in the Northern and Eastern provinces has created a new form of inequality and it has become a more pressing issue • The story that emerges is that the same forces that contributed to increasing growth and reduction of poverty are responsible for widening economic inequality. This is because people had different access to endowments that would enable them to integrate them into more dynamic sectors. Growth was not inclusive enough, poverty declined but inequality increased. It will be a challenge for policy makers to find alternative forms of growth that reduces both poverty and inequality • The government’s policy framework has many programmes to address inequalities and regional disparities but there are many loose ends and there is no integrated strategy to address the key areas to generate more inclusive growth

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